Taxation of timber income and timber assets are major concerns of landowners. Proper accounting and planning can save you thousands of dollars in taxes and help preserve your estate. Below are some key points and recommendations regarding timber taxation. This is general information only and should not be considered an official interpretation of federal and N.C. income tax laws. Tax laws are subject to interpretation and frequent change. Please check with your tax advisor on the applicability of current tax law to your particular situation and consult with your forester and accountant to determine what should be done to best protect your assets.
In October of 2004, the President signed HR 4520, the American Jobs Creation Act of 2004. This bill grew out of the need for Congress to respond to a World Trade Organization ruling that a $5 billion annual subsidy for U.S. exporters was illegal. As usual, this bill became a vehicle to do other things. Included in it were two major changes in federal tax policy that affect private landowners and forestry.
The legislation contained language that amends the Internal Revenue Code (IRC) Section 631(b) to eliminate the requirement for timber sale contracts to contain a “retained economic interest” provision, which means that non-industrial private forest landowners are no longer forced to sell under pay-as-cut contracts and are able to use “lump sum” sale contracts with no concern over the loss of capital gains treatment.Other timber-tax provisions added to the bill allow expensing of up to $10,000 for reforestation costs in the year of occurrence with an accelerated amortization rate of 60 months for the remaining costs (a change from the current $10,000 tax credit), allow voluntary election of IRC Section 631(a) by timber industry to help with how they calculate their capital gains on timber and establishes a modified safe harbor rule for timber Real Estate Investment Trusts.
The changes to the reforestation tax provisions were significant. At one time, a landowner could expense only 10% of $10,000 invested in reforestation in the year it was incurred. The remaining amount could be amortized over 72 months. A landowner can now expense $10,000 in the year it’s incurred and then expense the remaining amount over five years (60 months). These changes went into effect January 1, 2005.